Since the start of 2022, fears of recession, rising interest rates, high inflation, supply chain disruption and ongoing geopolitical conflict […]
The more markets fall, the more shortsighted they seem to become as they lose focus of the big picture. At GuardCap Asset Management Limited (“GuardCap”)1, we take the opposite approach; we are long-term investors. We have built our investment strategy on long-term thinking, forecasting and holding periods. We believe this strategy gives us an edge in a market that has a pervasive anomaly created by focusing on the short term, often leading to underestimating the long-term earnings and cash flows of companies showing sustainable growth and, thus, the undervaluation of their stocks. We believe this allows us to identify companies that the market misses.
We conduct extensive fundamental analysis on every company in the portfolios we manage. In fact, the portfolio management team at GuardCap devotes 70% of their time researching companies we own or those we believe are capable of earning a place in our portfolios. We thoroughly research each company and are confident they can provide sustainable, above-average earnings growth over the long term. Our extensive research and long-term perspective give us the confidence to maintain our positions through market downturns. Our strategy has an average holding period of more than 10 years, with some positions held for more than 20 years. Periods of higher volatility do not prompt us to reposition our portfolio holdings, as we are confident in the resilience of the companies we hold.
Every holding must satisfy all 10 of our Confidence Criteria. Two of the most important criteria are operating in an industry benefiting from a long-term secular growth tailwind and having a sustainable competitive advantage.
We explore these criteria for each of our top three holdings (accounting for more than 20% of our portfolio holdings, as of June 30, 2022) below.
1. CME Group is the world’s largest financial derivatives exchange and trades in asset classes that include agricultural products, currencies, energy, interest rates, metals, stock indexes, cryptocurrencies and futures.
Secular Trend: Long-term growth in demand for products offering financial security and risk control for business and investment.
CME offers the widest range of global benchmark products across all major asset classes: exchange-traded and over-the-counter. The exchange charges a transaction fee to bring buyers and sellers together on the Globex electronic trading platform or through open outcry. It provides clearing and settlement services, regulatory reporting solutions and market data services.
The key driver of long-term growth is the sophistication of businesses and investors who use the products traded on the Chicago Mercantile Exchange to hedge risk.
Sustainable Competitive Advantage: The greater the volume traded on an exchange, the greater the liquidity available to investors and the better the pricing offered. This, in turn, attracts more investors to the market, which creates a virtuous cycle of increasing demand, greater volumes and so on. Key differentiators are liquidity and price transparency, CME’s diverse product line, the safety and soundness of CME’s markets, superior trading technology and capital efficiency for clients.
2. Novo Nordisk is one of the world’s largest insulin producers, with diabetes care medications generating the majority of its revenues.
Secular Trend: Aging population and unhealthy lifestyles.
Demand for insulin is not affected by the economic environment; those who require insulin must consume it for the rest of their lives. Costly complications such as nerve damage, strokes, heart attacks, blindness and kidney disease are further incentives to identify and treat the disease. While the World Health Organization (WHO) currently estimates that more than 400 million people have diabetes, this number is likely to increase given that rates of obesity, a key risk factor for Type 2 Diabetes, are growing.
Sustainable Competitive Advantage: The company’s leadership in the research and development of treatments, such as protein engineering techniques, has led it to become (and remain) the leading provider of effective, innovative treatments for diabetes. As the leader in its field, Novo Nordisk benefits from economies of scale (in terms of research and development spend, the production of proteins and distribution) and economies of experience.
3. EssilorLuxottica is the largest eyewear company in the world, designing, producing and selling ophthalmic lenses and frames.
Secular Trend: Aging population.
The WHO estimates more than three billion people have uncorrected vision; a figure estimated to rise to nearly five billion (half the global population) by 2050. The increase will be driven partly by lifestyle changes (more time on computers and phone screens) as well as the aging population.
Sustainable Competitive Advantage: EssilorLuxottica is the largest vertically-integrated eyewear company in the world, allowing it to control all aspects of the design, manufacturing and sales process. In addition, the company’s Research & Development budget accounts for more than the entire R&D spend of the rest of the ophthalmic industry, helping it stay ahead of the competition.
While we’ve discussed only three of our holdings, we are confident in the fundamental strength and quality of them all. We understand that volatility can be difficult for investors to stomach; however, our portfolio of high-quality companies capable of sustaining above-average growth over the long term gives us the confidence to stay focused on the forest, not the trees.
1:GuardCap Asset Management Limited is the UK affiliate of Guardian Capital LP, and sub-advisor of the Guardian Fundamental Global Equity strategy.
This commentary is for general informational purposes only and does not constitute investment, legal, accounting, tax advice or a recommendation to buy, sell or hold a security or be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP.
The opinions expressed are as of the published date and are subject to change without notice. Assumptions, opinions and estimates are provided for illustrative purposes only and are subject to significant limitations. Reliance upon this information is at the sole discretion of the reader. This document includes information concerning financial markets that was developed at a particular point in time. This information is subject to change at any time, without notice, and without update. This commentary may also include forward looking statements concerning anticipated results, circumstances, and expectations regarding future events. Forward-looking statements require assumptions to be made and are, therefore, subject to inherent risks and uncertainties. There is significant risk that predictions and other forward looking statements will not prove to be accurate. Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. Investments in foreign securities involve certain risks that differ from the risks of investing in domestic securities. Adverse political, economic, social or other conditions in a foreign country may make the stocks of that country difficult or impossible to sell. It is more difficult to obtain reliable information about some foreign securities. The costs of investing in some foreign markets may be higher than investing in domestic markets. Investments in foreign securities also are subject to currency fluctuations. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Certain information contained in this document has been obtained from external parties which we believe to be reliable, however we cannot guarantee its accuracy.
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